The Financial Conduct Authority's (FCA) test case against eight insurers at the high court achieved its aim in going some way in defining the validity of commercial insurance policies business interruption clause. The court provided a detailed judgment on Tuesday 15 September, supporting the policyholders in two aspects of their business interruption clauses, namely the disease clause and the prevention of access clause. Whilst the judgment is a considerable success for some of the policyholders, however, there are still some hoops to jump through before the whole situation is resolved. The FCA is very keen to bring resolution to all concerned, particularly the 400,000 policyholders and the 60 insurance businesses. The court reviewed 21 policy wordings covering disruption and government-ordered closures related to 700 types of policies,
The current perilous situation that businesses find themselves in drives the need for speed of action; recognising this the FCA filed a fast track "leapfrog application" (an action that is usually taken in, certain circumstances, to shorten the legal process prior to an anticipated appeal) on a precautionary basis, notwithstanding the fact that the FCA is working with the eight insurers plus the two intervenors involved in the case in an attempt to avoid the need for an appeal to the Supreme Court and enable the policyholders to be paid out as soon as possible. As expected, seven of the eight insurers have also filed precautionary leapfrog applications. The aim of all parties is to reach agreement.
Nick McEwen, an associate in the corporate and commercial litigation team, commented "the range of businesses whose commercial insurance policies and the wording thereof appears to fall into categories recognised by the high court decision, (therefore enabling them to make a claim), should recognise that in order to do so the wording of their policies and the relevant clauses will have to be poured over, examined and analysed to ensure that a) the wording of their policies actually does fall in line with the court's judgment and b) there are no small escape routes that the insurers can use to avoid honouring the policy."
Business interruption insurance typically is intended to cover a business for loss of revenue or profit resulting from damage to premises or property due to such causes as fire or a serious storm. Businesses are at liberty to take out extensions to this clause to cover other circumstances that brings about the loss of revenue such as denial of access or closure of the premises as well as explicitly extending the clause to include infectious diseases. The court, in the FCA test case, focused mainly on the wordings related to this type of extension of the business interruption clause.
The court considered in detail a number of elements within the insurance policies relating to the entire question. However, there are broadly four main elements to the high court judgment and guidance a) prevention of access clauses; b) disease clauses; c) hybrids of the two previously mentioned clauses and d) trends clauses. This is not an exclusive list and there are some other triggers within the policies and insured businesses should ideally be aware of all aspects of the test case.
The insurers' initial rejection relating to causation pivoted on the case of Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corp  on which the insurers relied. The Court found, that in the 1974 case, if the loss was caused by interdependent concurrent causes including an uninsured risk, (which may be the pandemic in the present circumstances if this ruling applied), it could not be proven that the loss was, in fact, caused by an insured risk. However, in the FCA case the Court found in that the Wayne Tank and Pump Co Ltd v Employers' Liability Assurance Corp. decision was irrelevant due to the court's finding that all proximate clauses, regardless of how many there are, are all insured. The Court further held that in the case of business interruption the proximate cause was the combined peril of the incidence of a notifiable disease which was subject to individual outbreaks, although separate, they were the effective cause of the actions taken on a national level.
The Court ruling on the equally disruptive prevention of access clauses, the component parts of an incident that triggers the prevention of access clauses are, i) the incident itself which results in the actions taken by the authorities; ii) the actual actions ordered and sanctioned by a competent authority; iii) the result of the actions which prevent access the insured's business premises. The actual wording of the commercial insurance policy is key with regard to these clauses.
The court examined the wordings and phrases used in the insurance policies, some of which are outlined below:
The Incident – the event resulting in actions leading to prevention of access
The sample wording relating to the causative incident was examined and the Court found that the wording associated with the prevention of access, such as "danger or disturbance in the vicinity", "emergency in the vicinity", "incident within one mile of the vicinity" and "injury in the vicinity" was aimed at specific incidents in a local area. For these wordings to apply the restrictions imposed by the relevant authority would have had to be in response to a local occurrence of the disease. The Court held that the individual outbreaks form indivisible parts or, alternatively, each of the individual occurrences was a separate but effective cause of the national actions.
There was an attempt to suggest that the government was not a competent local authority as some of the wording relating to the prevention of access clauses referred specifically to a "local" authority but the argument was abandoned. The Court found that with regard to the imposition of relevant restrictions in the locality, restrictions could be applied by whichever authority was competent to do so, including central government.
The Actions imposed
The Court acknowledged that initially the government issued guidance rather than mandatory instructions to businesses. The Court held that actions or orders that prevent access were required to have the force of law, therefore the "advice guidance" was not held to be sufficient to trigger the cover; whereas the later regulations issued on 21 and 26 March may apply. It was noted that there were differences in the regulations, particularly between the types of retailers. Those premises selling essential goods were permitted to remain open but those that were not were compelled to close. A determination as to whether the government action triggered cover must consider the precise of the policy wording together with the tangible effect on the specific business.
Prevention of Access – the wordings
The sample wordings that the court considered in the prevention of access clauses were found to be variable. The court found that "inability to use" was quite clear and this term was dissimilar to "hindrance" or "disruption." The Court recognised that there may not be a complete inability to use the premises simply because part of the premises could not be used. The Court felt that where there was partial use of the premises the question of "inability to use" would have to be considered on the basis of the facts of each case.
The Court also recognised that as far as the word "prevention" was concerned it denotes impossibility, however, it held that physical prevention of access was not required. The insured parties would have to demonstrate that the business was closed for the purposes of carrying on the business, or a fundamental change in the use of the premises.
It was found that the word "hindrance" denotes a difficulty but not an "impossibility". This distinction's implication was defined in the Tennants (Lancashire) Ltd v CS Wilson & Co Ltd.  AC 495. An example of which would be, a restaurant being prevented from permitting the consumption of food and drink on the premises but could still provide its existing takeaway service. In such circumstance, a prevention of access clause would not be triggered. However, if a restaurant set up a take-away service that it had not previously offered in response to the government regulations, the prevention of access clause may hold as the business was sufficiently different.
The word "interruption" was considered and found to be apply similarly to the example above of a restaurant that set up a take-away service as it could not operate in the usual manner, so not a complete termination of the business but without doubt a significant disruption.
Such policy extension clauses are usually triggered by an outbreak of a notifiable disease within an area close to the insured business. Insurers attempted to suggest that as the government's actions were caused by a global pandemic as opposed to a localised event that the clauses fell outside the insured peril. The Court did not agree, finding that such cover was triggered by the extensive outbreak of disease. Furthermore, cover is not defined as limited to only disease outbreaks in limited areas in close proximity to the business, and that the interpretation put forward by the insurers was not expressly defined in the policy and therefore their interpretation would not be appropriate to the type of business interruption insurance product. " The Court held that the nature of coronavirus was such that any occurrence within England and Wales would have an impact therefore all outbreaks should be considered to be within the relevant vicinity of businesses. Infectious disease unavoidably can extend far and wide and provided the insured businesses can establish that the outbreak of the disease extended within the radius indicated insurance cover will be triggered.
As the term suggests such clauses are combined clauses, for example the occurrence of a notifiable disease and the inability to use the insured businesses due to the resulting restrictions imposed by the local authority to combat a situation. The Court has taken the same approach to the hybrid terms as has been taken with regard to the related stand-alone disease and prevention of access clauses outlined above.
Trends clauses relate to how the calculation of the insured loss is worked out as they take account of the circumstances "trends" of the business that holds the policy. The insurers attempted to rely on a previous decision as a precedent, that of Orient-Express Hotels v Assicurazioni Generali Spa (UK) (t/a Generali Global Risk)  EWHC 1186 (Comm) arguing that the insured businesses could not demonstrate the "but for" element, meaning that the businesses could not show that the loss to the business would not have occurred "but for" the peril insured due the fact that many businesses would have also suffered a loss due to coronavirus. The Court saw it differently, finding that it did not have to follow the Orient Express case as the decision, in that matter, had been incorrect.
Negotiations between the FCA and the eight insurers are still ongoing in the hope of reaching a satisfactory conclusion and that no further legal action will be necessary. Permission has been granted for the Supreme Court to decide on the case if it becomes necessary and it is expected to be heard before the end of the year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.